Backloading is a reform of the carbon market introduced in 2014 with the aim of increasing carbon prices and therefore the incentive to invest in low carbon technology. By reducing supply entering the market via near daily government auctions a shortage in the year on year balance of allowances is created, thus increasing the likelihood of price increases on the assumption demand is greater than supply.
A combination of the economic slowdown and a flood of UN Offset allowances within the EU ETS contributed to a massive oversupply and sent prices tumbling from ~€30 a tonne in 2005 down to below €3 a tonne in 2013. With the over-supply growing and topping 2 billion allowances, more than 1 year’s total emissions for the whole of the EU ETS, the EU Commission saw the need to reform the market. Backloading became the first of three structural reform measures with the market stability reserve also becoming law in 2015. The Phase IV proposal is currently underway but not due for completion until late 2016 or early 2017.
The process of backloading is relatively simple and reduces primary supply coming into the market via the government auctions in the near term with a view to putting it into the market later on. The auction volumes are reduced by the following totals
- 2014 – 400Mt
- 2015 – 300Mt
- 2016 – 200Mt
The backloaded allowances were scheduled to enter the market in 2019 and 2020 in addition to the normal auction volumes for those years, however, the creation of the MSR has ensured the 900Mt will now not re-enter the market in those years but will be added to the MSR. On its own, backloading was only capable of increasing prices in the near term as the total allowances in circulation come the end of Phase III would still have been the same. The creation of the MSR has avoided the deluge of allowances hitting the market in 2019 and 2020 which were forecast to push prices back down to the levels seen in 2013.